This is the first in a mini-series of Xceptor blogs evaluating T+1. Our focus will centre on the challenges banking & financial services firms face when dealing with fundamental changes in processing and settlement cycles.
From 28 May 2024, all US and Canadian securities trades must settle one day after trading. Or, as it will be known, on a T+1 basis.
A move away from the current T+2 cycle will:
- Improve trade settlement efficiency
- Reduce liquidity usage and volatility
- Lessen market risks
- Lower margin requirements
- Enhance capital / operational efficiencies
In addition to enhancing custody and settlements, the move will have a ripple effect on specific processes in the securities trade lifecycle.
Moreover, other countries across the world are contemplating similar moves.
Although a global move towards T+1 settlements will likely create added benefits, if not examined at a strategic macro level, there could also be significant complications.
The proposed transition from T+2 to T+1 will reduce the processing time by half and likely spur wholesale market infrastructure, technology, and behavioural changes for market participants.
As such, asset managers and financial institutions should begin reviewing their trade processes and operating models. Doing so will prepare them for the test phases scheduled for Autumn 2023 while enhancing readiness for the 2024 implementation and its broader impacts.
Impact analysis starts now
As part of these preparations, it will be critical to work closely with service and technology partners who can support the application of digital solutions and ensure real-time access to data through compression analytics and oversight tools. With these solutions and tools, trade processes can be optimised to help get ahead of the compressed timeframes.
For sophisticated firms, 80% of the T+1 challenge may already be within grasp. However, to operate in shortened cycles and cope with the expected volume increases following T+1 implementation, questions of scale and robustness remain, even if initial scaffolding is in place.
If T+1 proves successful, there can be little doubt that costs to trade will reduce, leading to an increase in volumes and associated post-trade ramifications.
It is the remaining 20% of the T+1 challenge that is likely to prove the biggest hurdle. Firms will be challenged to automate areas where established T+2 environments are firmly entrenched and are wrapped in legacy, sub-optimal processes, and outmoded working practices.
Bringing in the forensics
Against the backdrop of these fundamental changes, specific tasks, actions, and processes will be unsettled by the move to T+1. Knowing which face the most significant disruption will help firms build a more comprehensive strategy for arriving at T+1 prepared for all eventualities.
Ahead of the H1 2024 implementation, firms must ready themselves for a raft of changes that will affect trade allocations, affirmations, and confirmation turnaround times.
A move to T+1 compresses the post-trade processing time from 12 business hours in a T+2 environment to just two. This heavily curtailed processing time will occur between the end of the trading window and the start of the settlement window.
Still embedded in this trade flow are non-standard practices. The communication of allocations via fax and email, affirmations delayed through a lack of crucial settlement information, and confirmations waiting, or unfinished, based on incomplete data.
A compressed timeframe means operational considerations for all firms functioning in European securities markets, and investors from other regions, as time zone differences will impact same-day matching processes.
In short, the time to communicate and resolve any breaks or exceptions will reduce.
The sobering effect
The shortened settlement cycle will force less efficient firms to automate manual processes and upgrade trading technology to meet T+1’s increased demands and constrained timelines.
This widespread automation will benefit the wider market as it’s likely to create industry-wide circles of operational risk reduction and increased productivity.
Proper focus on the 20% inefficiencies will naturally result in eliminating sub-optimal or redundant processes, saving time, reducing errors, and decreasing trading costs.
The exponential market impact of everyone being a bit more efficient and greater standardisation of industry practices should not be underestimated.
Look out for the next blog in our T+1 series, focusing on Accelerated Account Opening in a T+1 World.